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My PFS - Technical news - 29/09/2015

Personal Finance Society news update from 9 September 2015 - 22 September 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

Autumn statement date announced

(AF1, AF3, AF4, JO2, JO3, JO5, RO2, RO3, RO8, CF2, FA2, FA7)

The Chancellor of the Exchequer has announced that a joint Autumn Statement and Spending Review will be published on Wednesday 25 November 2015

Trustee investment opportunity

(AF1, RO3, JO2)

In this article we provide a reminder of the factors trustees should take into account when investing trust funds. 

The investment of trust funds is one of the most difficult duties for trustees. They have to take account of numerous factors before deciding how trust assets should be invested. So how do trustees decide what to invest in so as to deliver a suitable outcome for the beneficiaries? As a starting point trustees should look at the express powers given to them under the terms of the trust. In addition, trustees should be aware of their statutory powers and duties and how these may differ depending on the capacity in which they act. For example, a professional trustee is expected to have a higher standard of care compared to a lay trustee.

You should also be aware that as well as the express powers in the trust, trustees in England and Wales are governed by the statutory powers created by Trustee Act 2000.  These statutory powers give most trustees wide investment powers to invest trust assets and are in addition to any express powers contained within the trust - but subject to any restriction or exclusion imposed by the trust instrument. For most trusts (subject to specifically stated exclusions) this means that most retail investment solutions - notably collective investments and investment bonds - will be "within scope/permissible " in principle.

The Trustee Act 2000 also imposes a statutory duty on trustees to exercise reasonable care and skill when considering investment matters though. With this duty comes a requirement to ensure that trust funds are invested in a suitable manner, with appropriate diversification and on the basis of proper advice. It is also essential for trustees to review the investments of the trust fund on a regular basis.

The need to obtain advice

In exercising their power of investment or when reviewing investments trustees should obtain proper advice before proceeding. Exceptionally, trustees need not obtain advice if they reasonably conclude that it is unnecessary or inappropriate to do so. This exception will normally apply where the value of the trust fund is small or where the trustees are sufficiently qualified to give advice themselves.

'Proper advice', in this context, is the advice of a person reasonably believed by the trustees to be appropriately qualified by ability and practical experience of financial and other matters relating to the proposed investment.

Where individuals are acting as trustees in the course of a business or profession, they are treated as having such special knowledge or experience that might be reasonable to expect of a person in that kind of business or profession.

Importantly, this means that solicitors or accountants who act as trustees in a professional capacity will be subject to a greater standard of care than, say, family members. This requirement for trustees to seek "proper advice" is excellent news for financial advisers and offers a very good opportunity to collaborate with other professionals, e.g accountants and solicitors, who are often the "gatekeepers" to trustee investment funds.

Regular reviews, trust suitability and tax considerations

The regular review of the trust investments should take account of both investment returns and the objectives of the trust. Trustees must give consideration to the size of the trust fund, the way in which trust investments will be taxed and the nature, needs and tax positions of the beneficiaries. It is also advisable to make changes in the assets held where appropriate.

Where professional advice is sought, it is common for a suitability report to be completed when carrying out a trust review. A suitability report will enable the trustees to identify whether existing allocations meet the current objectives of the trust.

The report can also cover other aspects, such as how the current assets are taxed and comment on the current diversification strategy. This is of particular importance as trustees are required to diversify, where possible.  It can also provide an overall summary of the current position of the trust.

Case law has, in the past, implied that trustees who do not carry out regular reviews could be held liable. The leading case of Nestle -v- National Westminster Bank Plc [1994] 1 All ER 118 was decided by the Court of Appeal in favour of the trustee bank. However, it was held that the bank had misunderstood the scope of its investment powers, and had therefore breached its duty both to undertake regular reviews of the investments and to diversify out of the limited range of equities that constituted the relevant estate. However, the appellant was unable to establish causation. It was for her to prove on the balance of probabilities: -

  1. that if the bank had regularly reviewed the investments and had understood its investment powers, it would, as a prudent trustee, have diversified the portfolio; and
  2. that the notional diversified portfolio would have been worth more than the actual portfolio. This was a matter of expert evidence and the appellant was unable to discharge the burden of proof. So, based on the facts, the appellant lost.

In the Court of Appeal Staughton LJ held there was no breach of trust. Despite this the trust company fell 'woefully short of maintaining the real value of the fund, let alone matching the average increase in price of ordinary shares'. The company had not acted 'conscientiously, fairly and carefully' and there was 'not much for the bank to be proud of in its administration of the… trust'. So that's the "take away" message. And it's an important one.

Finally, taxation and administration costs should be taken into account prior to investing the trust fund. Regard should be given to optimising the tax position of the trustees and the beneficiaries. For example, it may be possible to reclaim tax deducted at source for a non-taxpaying beneficiary on any savings income or it may be possible to assign a bond/segments to a beneficiary who is a low rate taxpayer pre encashment rather than having the trustees encash the investment when the gain may be assessed at a higher rate on the trustees or the settlor - depending on the circumstances.

There are also the new dividend tax changes (to take effect from 6 April 2016) to take into account. It seems tolerably clear (although we await the draft legislation) that trustees will be liable to tax on dividends at the highest rate of 38.1% and with no £5,000 dividend allowance.

This article will hopefully serve as a helpful reminder of the factors to consider when investing trust funds and perhaps, equally important, remind financial advisers of the opportunity that trustee investment offers for collaboration with other professionals.

The referred to imminent dividend tax changes offer a valid reason (arguably a requirement) for a comprehensive review of trustee investments.

An overview of the main duties imposed on trustees

(AF1, JO2, RO3)

The primary duty of a trustee is to ensure that they take control of the trust property and manage the trust in accordance with the terms and provisions contained in the trust deed on behalf of the beneficiaries.

In the preceding article we considered the factors which should be borne in mind when investing trust funds. While trustee investment is regarded as one of the key roles that a trustee is required to fulfil, there are also a number of other duties imposed on trustees. We therefore take this opportunity to provide you with an overview of some of these other duties. 

Trustees must exercise reasonable skill and care

The standard of care and skill expected of a trustee varies according to whether they are unpaid or a professional.  Section (1) of the Trustee Act 2000 sets out a duty which it refers to as the 'duty of care'. This statutory 'duty of care' is the duty to exercise such care and skill as is reasonable in the circumstances having particular regard to:

  • any special knowledge or experience that the trustee has or holds themselves out as having; and
  • where he or she acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.

Where professional connections are acting as trustees in a professional capacity, provided they do so in the course of business they will be subject to a greater standard of care than, say, family or friends.

Trustees must act in good faith

The appointment of a trustee is a personal one and cannot usually be passed on to someone else by the person appointed. The position is a fiduciary one. Therefore, trustees must act in good faith and in the best interests of the beneficiaries at all times. Trustees must not allow their personal interests to conflict with those of the beneficiaries.

Trustees must act impartially

Essentially this means that trustees must consider and ensure that all of the beneficiaries' entitlements are considered. For example, if the trust states that one beneficiary is entitled to income and another beneficiary is entitled to capital, the trustees need to invest appropriately to produce both income and capital growth. So, if the trustees invest to produce capital growth and no income, the needs of the income beneficiary would not be fulfilled and thus the trustees would not have invested in a suitable investment. Advisers will be well placed to help trustees make investment decisions in accordance with the terms of the trust. This is particularly relevant when considering investment in life assurance investment bonds which are, of course, non-income producing investments.

Trustees must act unanimously

As a general rule, trustees must normally act unanimously in any decisions they make, although there are a number of exceptions, for example, the trustees of a charitable trust may act by majority rule.

Trustees must keep proper records and accounts

Trustees should keep records of any changes they make to the investments and of money paid or loaned to a beneficiary. They should also keep records of any professional advice they may have received. They also have a fundamental duty to maintain and prepare accounts and to attend to compliance obligations such as the completion of tax returns.  In addition, all other trust documentation, for example deeds relating to the trust, must be kept up to date.

Trustees must provide information to beneficiaries upon request

Trustees must produce, on request, information and documents relating to the trust when required by the beneficiaries. This right extends to all beneficiaries so would include those under a discretionary trust. Trust documents would include the trust deed, accounts, legal advice, letter of wishes etc.…

Trust property must be secured

Trustees are under a duty to ensure any debts are recovered otherwise they would be breaking the terms of the trust. So, in cases where, say, a loan is made to a beneficiary the trustees must take steps to make sure that any loan will be repaid.

Trustees must not use trust property to benefit themselves

Trustees are not entitled to make a profit from the trust. For example, if the trustee is a professional, say an accountant, they must not manage the trust in such a way as to benefit from extra work unless they are specifically authorised to do so.

Trustees must hold regular meetings

Trustees should hold regular meetings, annually at the minimum, to ensure that the trust is actively managed and the trust fund is invested appropriately. All important decisions should also be recorded and kept with the other trust documentation.

The overview provided above should be enough to illustrate that the role of a trustee carries a vast amount of responsibility and, as such, it is essential that anyone acting in the capacity of trustee understands what is required of them before agreeing to the appointment.

Dividends and mixed/multi-asset funds

(AF4, RO2, CF2, FA7)

The arrival of the personal savings allowance and dividend allowance in 2016/17 raises some interesting questions about the use of mixed funds (ie. funds which earn interest and dividends on their investments).

The rules for distributions from collective funds currently offer the opportunity to 'convert' interest into dividend income and vice versa for individual investors. Ignoring the complexities of property authorised investment funds (PAIFs) and tax-elected funds (TEFs):

  • If the value of qualifying investments (broadly cash and interest-paying securities) exceeds 60% of total fund value then any distribution is classed as an interest payment and, for individual investors, 20% tax is currently deducted at source. This may change in 2016/17, when the personal savings allowance is introduced - the government is currently consulting on its options, which include making fund interest payments gross.
    At present, the situation is that any share dividends received by an interest-paying fund are effectively double taxed, although for funds held within an ISA or pension plan, the 20% tax is either not deducted or can be reclaimed by the plan manager.
  • If the 60% qualifying investment threshold is not breached, then any distribution is classed as a dividend and interest received by the fund is subject to 20% corporation tax (matching basic rate). As the distribution is a dividend, it is made with a non-repayable 10% tax credit in 2015/16 (but not in subsequent years). This treatment renders such funds generally tax inefficient in terms of interest income for ISAs and pension funds (other than insured schemes, which benefit from the income streaming rules).

Now consider the situation in 2016/17:

  • The personal savings allowance will make the first £1,000 of interest tax-free for basic rate taxpayers and the first £500 tax-free for higher rate taxpayers. The 350,000 (ish) additional rate taxpayers will receive no allowance.
  • The dividend allowance will similarly mean no tax is payable on the first £5,000 of dividends, regardless of the investor's marginal tax rate. However, once the allowance is exceeded, tax rates are effectively 7.5% higher than currently.

A fund that mixes interest and dividend income will mean that either one or other of the new allowances is used, but not both. This could be a drawback if the aim is to maximise the use of both allowances with the appropriate type of income. Separate fixed interest and equity funds, paying interest and dividends respectively may make more tax planning sense.

Even so, a fund that changes interest into dividend income could be advantageous for a higher rate taxpayer with no personal savings allowance remaining or additional rate taxpayer, provided they have unused dividend allowance. In these circumstances the interest will only suffer 20% tax in the fund. However, once the dividend allowance is exceeded, the situation reverses: the effective tax rate on interest income becomes 46% for a higher rate taxpayer and 50.48% for an additional rate taxpayer:

 

Higher Rate

£

Additional Rate

£

Gross interest to fund

100.00

100.00

Corporation tax in fund @ 20%

(20.00)

(20.00)

Dividend distribution

80.00

80.00

Tax on dividend @ 32.5%/38.1%

(26.00)

(30.48)

Net interest income

54.00

49.52

A basic rate taxpayer exceeding their dividend allowance suffers an effective tax rate on interest of 26%.

A similar argument applies to mixed funds which transform dividend payments into interest distributions, although there is much less scope for planning here given the smaller personal savings allowance and the likelihood that the investor is already in receipt of some interest from savings/deposit accounts.

Multi-asset funds are increasingly popular, but often not enough thought is given to their distribution tax treatment. This will be harder to overlook from next April.

HMRC action against "domestic" tax avoidance

(AF1, RO3)

Much publicity has recently been given to Follower Notices (FNs), Accelerated Payment Notices (APNs) and Partnership Payment Notices (PPNs).  All of these are intrinsic to HMRC's strategy for getting tax from those who have adopted what, in its view, amount to aggressive tax avoidance schemes - without having to wait for the outcome of the relatively long-winded assessment and appeals process.  This strategy is widely regarded as a bit of a game changer; and it's where a lot of the recent publicity in relation to tax avoidance has been focused, especially with the recent failure to have the APN/PPN process ruled invalid by judicial review. 

Just to be clear, though, the APN process does not deny the right to appeal against an assessment, just that if you have an APN issued then the tax "at risk" will "rest" with HMRC pending the outcome of the appeal as opposed to with the taxpayer.  The HMRC rationale for this is that "it's only fair" and "goes with the territory" that you have to accept if you enter into a scheme that has a DOTAS reference number.  Of course, the recent proposals (and draft regulations) to expand the number of schemes for which DOTAS reference numbers can be issued is a really important part of this strategy to increase the number of potential APN-generating transactions that are in the hopper - so to speak.

The ability to "get tax in" on account and ahead of the appeals process being considered has understandably been seen as highly newsworthy.  This is especially so as a number of relatively rich and relatively famous people have been affected.

But, despite all of this interest in advance payments, it's important that financial planners (and their clients) do not lose sight of the much bigger picture in relation to the relentless HMRC fight against what it sees as unacceptable, aggressive tax avoidance.  "Avoidance and legal interpretation" does, after all, contribute around 24% of the tax gap of £35bn. 

A really good reference point is the government Policy Paper, "Tackling Tax Evasion and Avoidance".  It has a very strong focus on evasion and especially offshore (being a strong contributor to the tax gap); but it also sets out a very clear and multi-faceted strategy to combat domestic tax avoidance.  Yes, it was issued under the previous coalition government, but it was issued in March this year and its contents remain, as far as we know, in principle, very much part of the policy of this current government.

In the section of the paper on "Domestic Avoidance" HMRC states that over a relatively short period the government has transformed the way avoidance is tackled. Rather than just acting to block individual abuses, the government's radical approach has altered the underlying economics of avoidance by accelerating the payment of disputed tax and stemmed the supply side by acting against the highest-risk tactics of avoidance promoters. These actions have been a significant leap forward but more can be done.

Intelligence-led approach

In the coalition (pre-election) Budget 2015, the government announced it would introduce a range of new measures for those who persistently enter into tax avoidance schemes which HMRC defeats. Avoidance is the preserve of a small, persistent minority. The measures the government has taken to date are working to reduce that minority. Amongst those that remain, there are some who avoid again and again, often using more than one scheme each year, knowing that some will fail but hoping that one will not.  

The government also announced that it is asking the regulatory bodies who police professional standards to take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance to protect the reputation of the tax and accountancy profession and to act for the greater public good.

No one can be in any doubt regarding the level of official commitment to stamping out what is thought to be aggressive avoidance.

Excessive withdrawals from a donor's bank account are sufficient evidence of an attorney's dishonesty

The Court of Appeal (Criminal Division) has held that, where a general deficiency in a donor's funds can be attributed to withdrawals made by an attorney acting under a lasting power of attorney (LPA), this will be sufficient evidence to prosecute the attorney for abuse of their position in accordance with section 4 of the Fraud Act 2006.

The case in point - R v TJC (2015 EWCA Crim 1276) - involved an appeal against a decision of the Crown Court not to proceed with the prosecution of a LPA attorney because there was no evidence of specific fraudulent transactions. Instead, the case had been based on a broad-spectrum evidence of withdrawals from the donor's accounts by the attorney that had seemed unreasonably high given the needs of the donor.

The Court of Appeal determined that it would be acceptable to present an amended argument that the total value of the withdrawals made by the attorney, when set against the reasonable costs that would have been incurred over specific periods in providing for the donor, showed that the attorney could not have been acting honestly.

This case is a reminder that, in extreme cases, the investigation team at the Office of the Public Guardian may refer suspected financial abuse by attorneys to the police. It also shows that it may not be necessary to match withdrawals of specific amounts from the donor's funds against specific expenditure for a prosecution for financial abuse to succeed.

Investment planning

The August inflation numbers

(AF4, RO2, CF2, FA7)

Annual inflation on the CPI measure disappeared again in August, with the rate falling from July's 0.1% to zero. The August inflation numbers from the Office for National Statistics (ONS) were in line with market expectations, which had also been a nil reading for last month.

The CPI showed prices rising by 0.2% over the month, whereas they rose by 0.4% between July and August 2014. The CPI/RPI gap widened by 0.2% this month, with the RPI increasing by 0.1% to 1.1% on an annual basis. Over the month, the RPI rose by 0.5%.

The change in the CPI's annual rate was driven by three main downward factors and two main upward factors, according to the ONS:

Downward

Clothing and footwear: Overall prices rose by 1.5% between July and August this year compared with a rise of 2.6% between the same two months a year ago. Prices of clothing and footwear usually rise between July and August as autumn ranges start to enter the shops following the summer sales season. However, the smaller rise this year follows a 2015 sales period in which prices fell by less than a year ago.

Transport services: Overall prices rose by 0.1% between July and August this year compared with a larger rise of 0.8% between the same two months in 2014. Within transport, the largest downward contribution came from motor fuels, with diesel prices falling by 6.2p per litre this year compared with a fall of 2.1p a year ago. Petrol prices also fell this year, by 2.4p per litre compared with a fall of 1.8p a year ago. There was a large downward contribution from sea transport, with fares rising by less than a year ago. These effects were partially offset by a small upward contribution from air fares, which rose by more a year ago, particularly on long-haul routes. It is notable that air fares have yet to react much to the oil price fall, a reflection of high demand (blame the English 'summer') and the hedging strategies most airlines adopt.

Year-on-year transport services prices are down by 2.6%, worth about a 0.4% decline in the overall CPI. However, the decline in the sector over 11 months (September 2014 - August 2015) is only 0.2%, a reminder that unless costs continue to fall, the disinflationary benefit of the fall in oil prices will soon fade.

Recreation and culture: Overall prices fell by 0.4% between July and August this year compared with a fall of 0.1% a year ago. The downward contribution came from a range of sectors, most notably books and cultural services.

Upward

Furniture, household equipment and maintenance: Overall prices rose by 1.7% between July and August this year compared with a rise of 1.0% between the same two months a year ago. The upward effect came principally from price rises for furniture and furnishings.

Food and non-alcoholic beverages: Overall prices were little changed between July and August this year compared with a fall of 0.2% a year ago. Year-on-year prices are down by 2.4%, worth about a 0.25% decline in the overall CPI.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was an annual 1.0%, down 0.2% over the month and unwinding half of last month's 0.4% jump. Three of the twelve components of the CPI index are now left in negative annual territory, one fewer than last month.

Fuel and food deflation continues to keep the headline CPI figure in check although, as we mention above, the fuel effect may soon disappear. The problem for the Bank of England remains much as we have said before: a rise in base rates when CPI is zero or thereabouts will be a hard sell. However, the Old Lady may gain some transatlantic cover in the next few days, as the Federal Reserve's long awaited September interest rate decision is due on Thursday. US inflation (for July) was just 0.2%, although the core rate was much higher at 1.8%.

The Fed holds back

(AF4, RO2, CF2, FA7)

After weeks of will-they-won't they, the US Federal Reserve has decided not to raise interest rates - yet.

It is a long, long time from July to September. The Federal Reserve, the US central bank, met on 28/29 July and set hares running by tweaking its post-meeting statement to say that "…it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market". This was a repeat of content of the June statement, but with the important addition - to Fed watchers - of the word "some". 

The unemployment rate subsequently fell from 5.3% in June and July to 5.1% in August, a seven and a half year low. Given that the Fed's statutory mandate is to "foster maximum employment and price stability", the 5.1% result looked to many like meeting the first half of the mandate. Theory (and economic history) suggest that once unemployment has reached a low, wage pressure then comes to the fore, leading to inflation. The standard central bank reaction is then to raise interest rates to cool things down. Janet Yellen, the head of the Federal Reserve, had spent some time since the July meeting explaining that she expected rates to rise in 2015 for that reason.

Ahead of the Fed meeting on 16/17 September there was a virtual 50/50 split among the experts about whether the talk would become reality. In the event, the Fed blinked. It repeated its phrase about wanting "some further improvement in the labor market", but gave a nod to world developments since the end of July: "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term".

The Fed's decision leaves us back where we were after the July meeting: waiting to see if the next meeting (on 27/28 October) will be 'lift-off'. This is reinforced by background papers showing that 13 of the 17 officials on the Fed's rate setting committee still believe that the "appropriate timing of policy tightening" is 2015. However, the median estimate of the short-term rate in the final quarter of 2016 shrunk 0.2% from its June projection, to 1.4%.

The Fed may formally be the US central bank, but it recognises its decisions have a global economic impact. With consumer inflation quiescent (0.2% in September), the Fed probably felt it could afford to kick the can six weeks down the road. That could well mean another six weeks of volatility.  On this side of the Atlantic, the Bank of England has been given a further reason to procrastinate on its rate rise.

Pensions 

Enhanced investment diversification for NEST

(AF3, RO4, CF4, JO5, FA2, RO8)

NEST (National Employment Savings Trust) is planning to enhance its ability to diversify members' portfolios by procuring an emerging market bond fund mandate. This will be added to the existing 'building block' funds that underpin the scheme's default NEST Retirement Date Funds and some of its alternative fund choices.

The scheme is searching for an actively managed pooled emerging market debt fund that blends bonds denominated in both local and hard currencies (predominantly US$). Details of the procurement process can be found here.

Mark Fawcett, NEST chief investment officer, said:

"Emerging market debt is becoming a strategic holding for a growing number of pension schemes. This is in part because emerging market bonds can offer attractive yields in an otherwise low yielding fixed income environment. We think it's appropriate to have emerging market debt among the growing number of asset classes NEST can call on to deliver better retirement outcomes for our members.

NEST is committed to searching out new opportunities for diversification where we see potential benefits for our members. Emerging market debt has evolved over the past two decades. What was once a small market of US Dollar-denominated sovereign debt is now a diverse mix of local and hard currency sovereign and corporate debt totalling more than USD 2 trillion. We want members to be able to reap the benefits of exposure to this market.

We believe an active management approach can take advantage of opportunities while managing the portfolio risk by avoiding unattractive or risky borrowers. By having an investment universe of both hard and local currency debt, the manager will have the ability to invest in the most attractive areas of the market."

The deadline for receiving tenders will be in October 2015 with a view to awarding the contract in early 2016.

Summary of NEST's investment approach

  • Unique default option comprising of 47 single-year target date funds, risk managed for each year of retirement,
  • Focused fund range including Ethical, Sharia, Lower Growth and Higher Risk options with the same low charge as the default,
  • Sophisticated risk management driven by best practice investment techniques, high quality analysis and transparent governance,
  • Cost-efficient delivery of innovative solutions powered by leading global fund managers,
  • Clear investment communications designed with and for members, employers and their advisers.

NEST in Numbers

As at 23 August 2015:

  • NEST has over 2.3 million members.
  • Our opt-out rate is 8 per cent on average and lower for younger members.
  • There are over 25,500 employers using NEST, plus over 1,000 self-employed members.
  • There are over 3,000 NEST connectors helping employers use NEST.
  • NEST has approximately £535 million invested on behalf of our members.

DC OPS: Governance standards and charge controls

(AF3, RO4, CF4, JO5, FA2, RO8)

Changes to from 6 April 2015 mean that many occupational defined contribution pension schemes offering money purchase benefits will have to meet new these requirements.

The key points to the changes are to:

  • Ensure the scheme meets new governance standards and explains how it has done so in an annual chair's statement.
  • Ensure the scheme has an appointed chair who signs the annual statement.
  • Ensure the scheme is compliant with the new charge controls where it is being used by employers to comply with their new duties under the automatic enrolment legislation.

The Pensions Regulator (TPR) has developed a number of products to help with the changes, including an essential guide to governance standards and charge controls, a list of frequently asked questions, and a checklist to help complete the new questions that have been added to the DC scheme return as a result of the changes.

Police officers retirement: Indirect age discrimination

(AF3, RO4, CF4, JO5, FA2, RO8)

Following the Government's Comprehensive Spending Review in 2010, police forces were required to make 20% cuts in their budgets over four years. Since 80% of their costs related to staffing Forces across the country looked to reduce staff numbers. Police Forces tended to use Regulation A19 forcing Police officers that had completed 30 or more years' service to retire on full pension.

Using Regulation A19, clearly disadvantaged officers over the age of 48 and those affected argued indirect age discrimination. Indirect age discrimination is not unlawful if justified as being a proportionate way of achieving a legitimate aim.  An earlier Employment Tribunal decision ruled that the use Regulation A19 had been discriminated against on the grounds of age.

Leave to appeal was allowed. That appeal has now been held, in the Employment Appeal Tribunal, West Midlands Police v Harrod & Ors, UKEAT/0189/14/DA.

Background

Regulation A19 allows a Police Officer to be forced to retire where their retirement would be in the general interest of the efficiency of the force. However it could only be applied to those officers who had served long enough (i.e. 30 years) to be in receipt of 2/3 Annual Pensionable Pay. Thus, the restriction ensured that only those best able to suffer the financial consequences of enforced retirement are subject to it.

This also meant of course that only those officers over the age of 48 could be forced to retire and this is exactly what happened when five police forces had to make manpower savings.

The claimants won their claims of age discrimination at the Employment Tribunal, the Employment Tribunal rejecting the defence of justification, saying that there were a number of alternatives that meant that enforced reliance on regulation A19 was not a proportionate means of achieving a legitimate aim. The respondents appealed.

The Employment Appeal Tribunal

Though the Tribunal was right to conclude that discrimination potentially occurred when the Forces chose to use A19, it did not focus upon the fact that what was discriminatory was inherent in A19 itself, and that there was nothing inherently age discriminatory in the practice of the Forces independently of that within the terms of A19 itself.

The evidence before it required the Tribunal to hold that certainty of achieving the necessary efficiencies was an essential part of the aim or means, and that there was no other way in which the aim could be achieved. It fell into error by failing to apply the principles in Benson and Blackburn, and to enquire whether the adoption of A19 was a reasonably necessary means of achieving the aim of the Force's scheme: it was not for it to manufacture a different scheme.

It wrongly concentrated on the process, and reasoning, adopted by the Forces when deciding to utilise A19, rather than enquiring whether at the date of the hearing before the Tribunal the use of A19 was proportionate (and hence justified, objectively). It applied too stringent a standard of scrutiny, and did so in part because it failed to engage with the fact that Parliament had chosen to make A19 in the terms it did, wrongly thought A19 was a provision intended to provide security of tenure (which it demonstrably did not, since it allowed for the opposite), and failed to analyse the reasons of social policy which underpinned the restriction of the use of A19 to those who had an immediate pension entitlement. It wrongly put forward as alternative but less discriminatory means of achieving the same object three matters two of which were entirely speculative, and none of which offered the necessary certainty.

Ruling

The Employment Appeal Tribunal upheld the appeal.

Police officers are not employees, and their office will only terminate (unless found guilty of misconduct or capability) upon retirement.

Regulation A19 of the Police Pensions Regulations 1987 allows for retirement of officers who meet certain criteria, if doing so is in the general interest of efficiency.

Overturning the employment tribunal's judgment, the Employment Appeal Tribunal found the only way the forces could be certain of a reduction in officer numbers was by use of A19, since there was no power to make a police officer redundant, and their actions were therefore justified.

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